Europe's Broken Economies

During September this year, much of Europe descended into mild chaos. Millions of Spaniards[2] and French[3] went on strike (following, of course, their return from six weeks vacation) against austerity measures introduced by their governments. Across the continent, there are deepening concerns about possible sovereign-debt defaults[4], stubbornly-high unemployment[5], Ireland’s renewed banking[6] woes, and the resurgence of right-wing populist[7] parties (often peddling left-wing economic ideas). Indeed, the palpable sense of crisis left many wondering if some European economies have entered a period of chronic decline — one which might eventually reduce Europe to being a bit-player on the world stage.

Obviously we should avoid over-simplification. In Germany[8] and Sweden[9], for instance, unemployment is declining while economic growth and exports are rising. Not coincidentally, both countries have implemented significant economic reforms over the past ten years. To the audible disappointment of the world’s left-wingers, Sweden is no longer Social Democracy’s poster-child.

Nor can Europe’s present woes be explained in mono-causal terms. Like America, property-bubbles and over-leveraged financial industries played a role in some countries’ meltdowns. But not every European nation presently enduring economic hardship experienced banking crises on the scale experienced by Ireland and Britain.

It will be decades before economists and historians completely diagnose what’s happened to Europe’s economies since 2008. Many, however, will likely conclude that many European countries’ economic culture helped them lurch into seemingly unending crisis.

“Culture” is one of those heavily over-used words. But in sociological and historical terms, “culture” is a way of describing, among other things, the approach to life, the values emphasized, attitudes toward work, the understanding of law, and ultimately the view of science, the arts and religion prevailing in a given society. Over time, these form a type of inheritance that can remain relatively stable in particular historical settings over several generations.

Again, we shouldn’t over-generalize. But we can speak of a West European-style economic culture that differs (at least for the moment) from what might be called “Anglo-American” ways.

Few, for example, would question that the dominant value presently informing Western Europe’s economic cultures is security. Poll after poll illustrates that if West Europeans are asked to choose between more security or more liberty, they overwhelmingly opt for security. That’s understandable, given 20th-century Europe’s history of political and economic instability.

Unfortunately the policies directed toward preventing reoccurrences of 1930s-like mass unemployment and the economic turmoil that fed the extremes of left and right have contributed to notoriously rigid labor markets throughout Europe, not to mention fiscally unsustainable welfare states. These have in turn helped facilitate many European nations’ high unemployment levels, and created deep anxiety among those unable to find full-time work.

Another defining feature of a society’s economic culture is its dominant mode of economic advancement. Broadly speaking, this occurs in two ways in modern economies. The first is through free enterprise and competition within a stable framework of laws, customs, and morality. The second is through closeness to government power.

Much of Europe has opted for the second approach. This manifests itself in what might be called hard or soft corruption. “Hard” corruption can be found, for example, in contemporary Greece — a country where it’s very difficult to get anything done without payoffs to one or more of Greece’s army of civil servants.

In a way, however, “soft” corruption is more insidious, because it avoids the overt unseemliness of accepting bribes. Soft corruption essentially involves cozy relationships between European interest-groups — such as businesses unwilling to compete, or public-sector unions intent on securing permanent employment for their members — and political parties from across the ideological spectrum. The interest-groups provide the cash and votes that help elect politicians. The politicians reciprocate by legislating to protect their supporters.

The fatal flaw of this arrangement is that neither hard nor soft corruption creates wealth. Instead, they shift the incentives away from creating wealth through entrepreneurship and competition. More and more people are thus drawn into playing a dysfunctional game in which the objective is to manipulate state power in order to redistribute wealth towards oneself.

Sooner or later, those genuinely interested in creating wealth in such cultures either give up or simply migrate to more entrepreneurial-friendly settings. Those left playing the redistribution game subsequently find themselves fighting over less and less. Sooner or later, something has to give. Greece has reached that point. Much of Europe is struggling to avoid following it into the abyss.

The irony is that the barriers to change in Europe are not economic. They’re political. And most European politicians understand this all too well. As Luxembourg’s prime minister, Jean-Claude Juncker said in 2007: “We all know what to do, but we don’t know how to get reelected once we have done it.”

Fortunately, no one is a prisoner of their culture, economic or otherwise. European governments could make substantial progress if they chose to accompany austerity measures with pro-growth, pro-entrepreneurship, and anti-crony capitalist policies.

Yes, the price for some might well be electoral defeat. But so be it. If the whole point of politics is to promote the common good rather than one’s self-advancement, then any European political leader with any integrity shouldn’t hesitate to think — and do — the unthinkable.